Transition from FiT to competitive bidding is a progressive change

How sustainable are the wind power auction bids, practically and financially? The wind energy sector has progressed significantly over the past decade. The installed capacity of the country has doubled in the last five years and reached a whopping 32,508 MW which is almost ~56 per cent of our installed renewable energy base. The sector has recently shifted from a FiT route to the competitive bidding regime, the industry rather reluctantly welcomed the step which could be seen from the healthy participation in the bid.

The first auction was conducted in February 2017, for a capacity of 1,050 MW by SECI for the Interstate Transmission System (ISTS), i.e. the projects were to be connected to the PGCIL network taking advantage of the charges and losses waiver. The tariff fell to Rs.3.46 from the lowest prevailing tariff of Rs.4.18. As per the PPAs signed, Mytrah Energy, Inox Wind and Ostro Kutch Wind Pvt. Ltd. would supply wind power of capacity 250 MW each. Further, Green Infra would supply 249.9 MW and Adani Green Energy 50 MW from their wind power projects through ISTS at a tariff of Rs.3.46/kWh discovered through the open and transparent competitive bidding process. PTC India has tied-up this wind power for sale to discoms of Uttar Pradesh (449.9 MW), Bihar (200 MW), Jharkhand (200 MW), Delhi (100 MW), Assam (50 MW) and Odisha (50MW) for meeting their non-solar RPOs.

It is also noteworthy that in the bidding regime, OEMs would no longer be at a liberty to charge a higher premium commensurate with attractive FiTs, therefore significant reduction has been observed in capital costs which has further driven down the bids. Also in case of the OEMs, the market has dried up with no state willing to sign FiT PPAs after the result of the first auctions. The bids for the second round have also been submitted and the auction is awaited. It is expected that the second round will be further more aggressive and the prices will come down further.

Piyush Goyal, Minister of New and Renewable Energy, recently indicated that bids would continue to happen every month henceforth which is a welcome signal for the industry and that wind would continue to blow. In line with the central scenario, states like Gujarat and Tamil Nadu have also come up with reverse auction bids for wind.

There have also been cases wherein discoms of states like Karnataka, Andhra Pradesh and Uttar Pradesh have declined from signing any wind PPAs for further procurement. These states have clearly shown their inclination towards shifting to competitive bidding over the FiT regime.

However, in times of low tariffs it is extremely important that wind tariffs are in line with the solar tariffs in order to make its acceptability among the discoms still strong. With the existing FiTs for wind being significantly higher than those of solar which was being discovered during competitive bidding, wind was facing the risk of pricing itself out of the market. Thus, the transition from FiT to competitive bidding is a progressive change, which would make the sector commercially popular and sustainable in true sense.

Are the economics sustainable or will we see similar doubts as the solar sector over drastically reducing prices? What is the profit-margin expected?
Unlike solar projects where major bids have happened in solar parks with required infrastructure already available, wind developers still need to arrange for land, approvals, evacuation up to the interconnection point. These unstated costs need to be considered in the project cost estimates. Further the drop in solar tariffs are driven primarily by the falling cost of modules, while a drop in WTG prices is not evident. Further, under the competitive bidding finding a good wind site with evacuation access to the central transmission corridors and mitigation of the counter party risk, is critical to ensure lower cost.

In our opinion, the recent bids are sustainable, but certainly not as lucrative as the FiTs prevalent earlier. The aggressive bidding has trickled backwards and has caused a fair share of competition among turbine manufacturers only. The economics of lower tariff discovered through competitive bidding has relied upon a combination of high PLFs, lower cost of debt, the best deals for O&M, as well as lower risk premium owing to PPA with entity that has better credit rating than the distribution companies. Our analysis indicates that tariff of Rs 3.46 discovered during the ISTS bid can still fetch investors reasonable returns of 12-15 per cent.

How do you see the market evolving post this?
The ISTS bid was the first of its kind, wherein the PPAs have been be signed with an entity that has better credit rating than the distribution companies, contributing to lower pricing. The sites chosen by developers are also in TN and Gujarat which are the windiest regions in the country resulting in lower bid tariffs. Unlike solar energy, wind farms in India are concentrated in a few high wind states such as Tamil Nadu, Maharashtra, Karnataka, Andhra Pradesh, Gujarat and Rajasthan. Even within these states, only selective sites offer high wind energy potential, which has been the main asset of OEMs as they had wind resource data recorded for a few years at these sites. Competitive bidding, especially ISTS has narrowed down the sites which need to be close to CTU sub-station.

Weaker pipeline of projects and shift to competitive bidding have marred the positive sentiment in the sector and OEMs have reported lowest quarterly profit in a year. Suzlon has reported a PAT of Rs 45.35 crore in quarter ending June 2017, whereas PAT reported in previous three quarters was Rs 499.45 crore, Rs 433.45 crore, and Rs 284.52 crore respectively. Inox wind in fact reported a loss of Rs 30.88 crore, while PAT reported during last three quarters was Rs 68.76 crore, Rs 116.56 crore and Rs 52.90 crore respectively.

Given that prices of solar power had fallen to as low as Rs 2.44/KWh and with wind FiTs more than double of this (Rs 4.78 in MP, and Rs 4.84 in AP for FY17), competitive bidding for wind was inevitable. With only a handful of sites on offer, and with prices of WTGs being bottomed out, each developer is trying to out think the other player in order to get a slice of the allocated capacity. Many developers are now extending the activities in the value chain including transportation, installation, land procurement, etc., to improve their margin and obtain higher returns from projects.